The Notion of Consumption Smoothing Means

question 96

Multiple Choice

The notion of consumption smoothing means:

• A) people tend to spend about the same amount each month.
• B) people tend to spend about the same amount each year, and if more is spent this year than in the past, they would tend to spend less next year.
• C) consumption varies less than income over a person's lifetime.In early life people tend to borrow, in late life people tend to dissave, but in their middle years they tend to save.
• D) consumption patterns tend to correlate perfectly with income.People spend the exact amount of their income over their lifetime.
• E) consumption tends to vary more than income over a person's lifetime.Although people should smooth their consumption over the years, they don't.If consumption were smoothed, people would be better off.

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Definitions:

Money Market

A segment of the financial market in which financial instruments with high liquidity and short maturities are traded.

Demand Curve

A graphical representation showing the relationship between the price of a good or service and the quantity demanded by consumers at various price levels, typically downward sloping.

Recession

A short-lived economic contraction, featuring a reduction in both trade and industrial activities, conventionally confirmed by observing a GDP decrease in two back-to-back quarters.

Money Demand Curve

A graphical representation showing the relationship between the interest rate and the total quantity of money that people hold at various levels of interest.